Moody's may cut Technical Olympic deeper into junk

NEW YORK, April 2 (Reuters) - Moody's Investors Service on Monday said it may cut its ratings on Technical Olympic USA TOA.N deeper into junk, citing expectations the company may further amend its credit agreements to account for lower interest rate coverage.

The homebuilder last month swung to a large quarterly loss compared with a profit in the year-ago quarter, hurt by a contingency created for the potential restructuring of a troubled joint venture.

Technical Olympic also said it was still in talks to reach a settlement with lenders to its Transeastern joint venture, the failure of which could hurt the company's business and liquidity. For details, see [ID:nBNG45372]

"Technical Olympic noted that it had received relaxation of its interest coverage covenant from the former 2.0 times to 1.35 times, but just for the third and fourth quarters of 2007," Moody's said in a statement.

Beginning in the March 2008 quarter, the covenant steps back up to 2.0 times.

"This suggests that another amendment, or set of amendments, will be required if and when the Transeastern issue is resolved, as the company would be unlikely to comply with the 2.0 times covenant in 2008, especially with the added burden of any Transeastern debt," Moody's said.

The company did not mention any changes to the leverage covenant in its debt, which suggests that it may be required to return to change these covenants due to the Transeastern situation, Moody's said.

Technical Olympic is also expected to be challenged in 2007 to pare back its land and housing inventory to turn its free cash flow positive on an annual basis, Moody's said.

Moody's has a corporate family rating of "B2," on Technical Olympic, five levels below investment grade. Its senior debt is ranked "B3," six levels below investment grade, and its senior subordinated debt "Caa1," seven levels below investment grade.

Technical Olympic's 7.5 percent bond due 2015 rose around half a cent on Monday to 71.81 cents on the dollar, according to MarketAxess.